Kyle Fahkrurazzi

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The rules that govern relations between states are termed as International Law and there is no superior authority to enforce such rule over states (multilateral treaties do not apply to all states, but only to those which have consented to be so bound, by signing and ratifying or acceding to them). International law is considered as binding upon them and it is due to this fact that the rule receives its status of law. Therefore, a state will argue that it has not agreed that such a rule is to be binding upon them or that the rule does not apply to the particular circumstances, instead of arguing that international law does not exist, in a case where a state wishes to avoid a particular rule.

Another aspect of International law’s characteristic is that it is not set down in any legislation approved by a parliament as compared to Criminal Law (in Penal Code provisions) or Constitutional Law (Articles in Federal Constitution). The Statute of the International Court of Justice, part of the Charter of the United Nations, defines the sources of international law, as in Article 38, in the following language:

1. The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply:

i. international conventions, whether general or particular, establishing rules expressly recognized by the contesting states;

ii. international custom, as evidence of a general practice accepted as law;

iii. the general principles of law recognized by civilized nations;

iv. subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

2. This provision shall not prejudice the power of the Court to decide a case ex aequo et bono (“according to the right and good” or “from equity and consecience”), if the parties agree thereto.

Article 59 provides ‘the decision of the Court has no binding force except between the parties and in respect of that particular case.’

To be continued...

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To Enong, welcome to my blog (again!). Up till now, for trustee, feel free to review my post on fiduciary nature of trusteeship, power of advancement, power of maintenance, tracing at equity, appointment of trustee, choice of investment and standard of care. More to come; remuneration and other relevant cases on demand. J

Fiduciary nature of trusteeship

1. The nature of a trustee’s duty towards a beneficiary is fiduciary. Examples of other fiduciary relationships are those of agent and principal, company director and company, and partner and co-partner. Additionally, the duties owed by solicitors, accountants, guardians and receivers are sometimes regarded as fiduciary.

2. Where a fiduciary has a discretion, he must not have a personal interest in exercising the discretion in a particular way. A trustee must be motivated to benefit the trust, not to himself. That is not to say that fiduciaries are not entitled to receive any benefit for their services but the amount of their reward must not depend on the manner in which their discretion is exercised. Banks, accountants and solicitors are after all unaccustomed to work for nothing.

3. A trustee must not set himself up in competition with the trust.

Facts

In Industrial Development Consultant Ltd v Cooley [1972] 1 WLR 443, the defendant, managing director of the plaintiff company, had been negotiating on its behalf a contract with the Eastern Gas Board. The negotiations failed and it was clear that the Eastern Gas Board objected to the plaintiff company particularly. The Eastern Gas Board then began negotiations with the defendant personally and the end result was that he terminated his contract with the plaintiff company and contracted with the Eastern Gas Board himself on similar terms to those originally proposed on behalf of the plaintiff company.

Held

The defendant was constructive trustee for the company of the benefit of the contract.

4. Duty not to make secret profit. A trustee must not make any profit by virtue of his position.

a) Facts

In Keech v Sandford (1726) Sel Cas Ch 1, the trustee took over the benefit of a lease, which had been devised to the trust, when that lease expired. The trustee would not have been in a position to do so had he not been trustee. The lessor had refused to renew the lease for the trust on the ground that the beneficiary was an infant against whom it would be difficult to recover rent. The trustee thereupon took the lease for his personal benefit and profited from it.

Held

The trustee was the one person in the world who could not take the lease for his own benefit because by doing so h would be profiting from his position. He had to assign the benefit of the lease to the infant and account for the profit received.

b) Facts

In Re Macadam [1946] Ch 73, trustees who used their position to appoint themselves to directorships of a company were held liable to account to the trust for all the fees they received as directors. This type of situation can commonly arise in private company because eligibility for appointment to directorships can depend on the legal ownership of a minimum number of shares, and indeed trustees may be under a duty to procure their representation on the board if it is necessary in order to safeguard the value of the trust share.

The causal connection between position and profit must be established. It was not in Re Dover Coalfield Extension Ltd [1908] 1 Ch 65. A case similar to Re Macadam, but where a trustee had already become a director before becoming trustee.

5. Misuse of opportunities and information.

Facts

In Boardman v Phipps [1967] 2 AC 46. House of Lord, Boardman was solicitor to a trust, whose property included a large but not majority holding in a company, Lester & Harris Ltd. He became worried about the competence of the management of the company, tried to persuade the managing trustee of the trust to acquire a majority holding in the company. His attempts at persuasion were unsuccessful, so Boardman decided to make the acquisition himself. He did so and then, by selling off some of the assets of the newly acquired company, Boardman made a large profit for himself. Additionally, because the trust still had a large share in the same company, his activities resulted in a large profit for the trust as well. It appeared that in negotiating for the majority shareholding he had obtained information in his capacity as solicitor to the trust which he would not otherwise have obtained. Phipps, a beneficiary under the trust, sued for an account of profit.

Held

Boardman held the shares acquired as constructive trustee for the trust and he must account for any profits made.

However, he was entitled to remuneration on a quantum meruit basis as payment on a liberal scale in respect of the work and skill employed in obtaining the shares and the profits therefrom.

6. A trustee may not purchase trust property.

For Holder v Holder and Wright v Morgan, please refer to the other worksheet / post.

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Power of Maintenance v Power of Advancement

1. Maintenance only applies when the beneficiaries is a minor while an advancement can be made to a beneficiaries at whatever age.

2. Payments by way of maintenance are payments out of income to provide for routine necessities such as education, clothing, food and lodging. Payments by way of advancement are sums advanced from capital to cover major costs such as setting up the infant in his profession, buying a business, or a house for him on marriage

3. Both advancement and maintenance are powers given to a trustee and is not a duty of a trustee.

4. In a situation involving power of maintenance, a remainder of a trust is entitled to maintenance even where the first beneficiaries is not entitled for the income under such trust (who only entitled the capital of the trust).

In a situation involving power of advancement, a remainder is not entitled to advancement without written consent from a sui juris first beneficiary.

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Power of Maintenance

The trustees have a discretion as to whether to maintain the beneficiary.

Payments by way of maintenance are payments out of income to provide for routine necessities such as education, clothing, food and lodging. A power to maintain is not implied into the trust instrument. It must be expressly given or the trustee can rely on the provision in Section 36 of Trustee Act 1949. An infant can’t give a valid receipt for the income. A valid receipt may be given to the trustees by the parent of the infants. If the infant is married, he may give a valid receipt himself.

Section 36(2)

The income arising out of the trust fund should be accumulated and invested in authorised investment. Any surplus income after the making of payment is accumulated, the trustees may use these accumulations at any time during the infancy as if there were income arising in the current year, thereby making the income available for maintenance purposes.

Section 36(1)

Trustees have discretionary power to maintain an infant beneficiary out of his share of the income. It is applicable if there is any other fund applicable for the maintenance or if any person is bound by law for the maintenance or education.

This discretionary power must be exercised subject to the proviso under the same section that;

a) The beneficiaries must be an infant

b) The infant must have a beneficial interest.

c) The income arising out of the infants share is applicable to the maintenance, until the infant attains his interest under the trust, must be held for his benefit.

Trustees also must have regard to, while exercising their discretion, the following matters set out in the proviso under the same section;

a) The age of the infant

b) His requirements

c) The general circumstances of the case

d) Other income available for maintenance.

Trustees should not normally give the infant money in excess of his needs if he has other financial resources.

The power to maintain can only arise where the beneficiary is entitled to receive intermediate income under the trust. This will be the case either where his interest is vested or where it is a contingent interest which carries the intermediate income. For example:

If the infant’s share does not carry income, then there can be no maintenance. This involves a situation where a trust instrument states RM10,000 to A when he attains 23 years old, the income to B until then. This gift does not carry interest income to A, therefore no maintenance can be given to A.

Under Section 36(1) the money may be paid to the parent or guardian of the infant or directly for his benefit. If the infant is married, they may pay it directly to him.

The power to maintain ceases when the beneficiary reaches the age of majority. Even if his interest is still contingent, the trustees must pay the whole of the income to him until he obtains a vested interest or dies.

Section 57

The court has inherent jurisdiction to approve the use of income or even capital for the maintenance of infant beneficiaries.

Cases

1. Wilson v Turner

[Refer case worksheet]

2. Bryant v Hickely

If the discretion is exercised in good faith the court will not interfere.

3. Re Greenwood

Although Section 19 protects trustees if they acted in good faith, it was held that this protection is only given if the trustees had actively exercised their discretion.

4. Bryant v Hickley

[Refer case worksheet]

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To my professional colleague, Enong, thank you for your support and feedback. Have you gone through my older post? Kindly informed that for ‘Trust’ section it is to be indicated by the ‘old moot court’ picture and for ‘Will and Distribution’ it is to be indicated by the ‘new moot court’ picture. Click ‘older post’ hyperlink at the bottom of my blog to view previous posts. Every post comes with numerical heading e.g Administration of Trust [13th Post (Power of Advancement)]. Thus, it is the 13^th post. Feel free to review the other 12. J

Power of Advancement

Payments by way of advancement are sums advanced from capital to cover major costs such as setting up the infant in his profession, buying a business, or a house for him on marriage. Such advancement is for certain non-recurrent beneficial purpose.

The power of advancement permits trustees to pay capital sums to or on behalf of a beneficiary some time before he is entitled to claim the fund. The power may be given by the trust instrument or the power contained in Section 37 of the Trustee Act 1949 may be used.

Section 37 allow trustees at any time to pay or apply capital money for the ‘advancement or benefit’ of any person entitled to that capital or a share thereof. The trustee can give beneficiaries some of his entitlement before the time. There powers are wide applying whether the interest is vested or contingent. The trustees’ discretion whether to exercise their power of advancement is absolute, so long as it is for the ‘advancement or benefit’ of the beneficiary.

‘Advancement or benefit’ under section 37 have been construed to mean setting up the beneficiaries in life as opposed to making mere casual payments to the beneficiaries. It may cover purposes such as purchasing business premises, a settlement on marriage, providing the means to enter into apprenticeship or supplying further capital to an existing business.

The power of investment is subject to several restrictions under Section 37:

Section 37(a)

Money advanced shall not exceed RM10,000 half of share, whichever is greater.

Section 37(b)

The money advanced must be accounted for and deducted accordingly upon absolutely indefeasibility.

Section 37(c)

[Illustration] A trust stated ‘To Ahmad for life, remainder to Busu and Camellia in equal shares. As Ahmad has a life interest the capital is held on trust to produce income for his benefit. Thus, to make any advancement during Ahmad’s life would deprive him of his entitlement by reducing the income he receives. However, if Ahmad consents in writing to an advancement to either Busu or Camellia, then an advancement is possible, but Ahmad must be of full age and consents in writing.

Cases

1. Re Evan ‘s Settlement

The trust instrument provided that the trustees could advance up to $5000, therefore excluded the statutory power of advancing up to half shares.

2. Advancement is allowed when;

a) Discharge of debt of the beneficiaries himself (Lawther v Bentick).

b) Paying the debt of a beneficiary’s husband (Re Kershaw). However, in Molyneux v Fletcher, where the trustees made an advance to a daughter-beneficiary to enable her to pay her father’s debt to one of the trustees and was held to be an improper exercise of the power since trustees should not make an advancement to benefit themselves.

c) An advancement to avoid tax (Pilkington v IRC).

3. Re Pauling ‘s Settlement Trust

Advance must be for the benefit of the beneficiaries and that it is applied for the purpose specified and if they fail to do so they will be personally liable to replace the money where the children filed a suit against the trustees for advancing money to their parents who used the money for their extravagant lifestyle.

Trustees must be satisfied that the advance will be for the benefit of the advancee. If the trustees decide to make the advancee an advance for a particular purpose, they must ask themselves whether the advancee will carry it out. Trustees should not make a payment for a purpose and then leave the advancee free to do with it as he pleases.

4. Pilkington v IRC

The trustees proposed to advance one half of the share of a two year old girl (Penelope) and resettle it. The child was in no need of the moneys advanced, and too young for the traditional purposes of advancement to be relevant. The only benefit to her would be the effect of saving estate duty, and one of the issues was whether this was a sufficient ‘benefit’. The house of Lord held that it was, and there was no need to show that the advance was to meet some personal need of the beneficiary; the saving of estate duty was itself a sufficient benefit. Nor was it relevant that other person might also benefit from the resettlement if the provision as a whole would benefit Penelope.